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What Quality Companies Are Contrarian Plays?

FYI | Mar 22 2017

By Peter Switzer, Switzer Super Report

What quality companies are contrarian plays right now?

What was the big lesson from 2016? There are always lots but the one I learnt from the BHP Billiton story (aside from never trust anyone pedaling “progressive dividend” talk) is that being a contrarian when the market takes a set against a quality company is a contrarian buying opportunity.

As I’ve said before, I wanted my expert mates to give me support at $14 but I took Gary Stone’s old advice to wait for the turnaround. Don’t worry about a short-term loss of potential profit but get in on a rising trend.

By high $15, I was ready to go long BHP but I told my fellow members of our Switzer Family SMSF that I expect that over a two to three-year time period, we should see a nice comeback in the share price.

Then lo and behold, it has shot over $20 in double quick time and is now $24.84 but it has been over $27 this year! And CMC’s Michael McCarthy still likes the stock but he’s got more guts than me. I like it and I’m long it but I’m not going deeper with it.

By the way, Woolworths (WOW) was a similar story, with none of my experts supporting me when it hit $20.60 last year, with most tipping it should slip under the $20 mark. It didn’t and is now $25.87 and has seen $26.50!

Contrarian plays with quality companies look like a reasonable strategy. I reckon ANZ proved that point as well.

But what about a company such as Blackmores?

Its Friday share price was $98.69. A few months ago, whenever it breached $100, the buyers rushed in. FNArena’s survey of brokers says the consensus target is $111.83 so there is 13.3% upside and a forecasted dividend for 2017 of 2.9% (if you can trust a forecast). And you will have to add in a fully franked dividend.

But is it a quality company? The market once thought it was when in April last year it was a $200 company!

I think it is but not of the same calibre as long-term quality performers, such as the banks and the big miners, as well as the likes of WOW and Wesfarmers. Blackmores (BKL) is at a crossroad and if it digs itself out of this market-doubting hole, then it will creep up into the $100 plus range again.

And what about Domino’s? It was an $80 stock in mid-2016 and is now $56.37 but the brokers have a target of $70.40, as I pointed out last week. So the experts like it but some heavy hitters/shorters don’t have an appetite for pizza from DMP!

One expert I talked to said he’d dive in at $45 but McCarthy says he’s buying now. I put DMP in the BKL class of quality — it’s yet to be proved but I reckon they’ll pull it off — though it might take a little time.

I guess they look like a contrarian play but their different quality means you might take the punt with it, like I did with BHP, but you might have less cash commitment.

And while we’re on unloved stocks, what about Vocus Communications (VOC)?

Macquarie has liked this once-loved telco for about a month, but it has 11.83% of its stock shorted. VOC is at $4.23 and the target price is $5.27, so there’s 24.6% upside, if the expert brokers are right. In case you never tested these guys out, their win rate is not as good as the miracle horse Winx!

So how do you play the companies of this relatively unproved quality? Maybe you lump them together and play them as a threesome. With all three, there’s positive smoke and they could fire up in the not-too-distant future. In a perfect world, you might find seven others to throw into your ‘nearly quality companies’ category and play them as a group like a fund manager might.

This week on my TV show, I’ll press my experts to add to my three companies named herein. I’ll see if I can get a consensus on other possible contrarian, not-quite-quality companies.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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